Top 10 questions on environmental projects

Mayfield, James

Answers to the most frequently asked questions about China’s environmental sector

China’s environmental problems are severe. High rates of suspended particulate matter in the air, polluted water, and loss of old-growth forest cover that leads to desertification and flooding have left China with a shortage of safe and usable air, water, and land. The country’s rapid economic growth and large population exacerbate these environmental problems.

The PRC government has estimated that to meet the environmental goals of its 10th Five-Year Plan (2001-05), it will need to spend roughly $85 billion-1.3 percent of its total GDP for the period (see Figure, Table). Of this total, 11 percent will likely come from the central government; provincial and local governments are to supply around 35 percent. The central government seeks about $4 billion from foreign governments and multilateral banks and hopes that private enterprises in China will provide the remaining funds.

These funding needs, together with China’s World Trade Organization entry and preparations for the 2008 Olympic Games in Beijing, have presented and will present many environmental-sector opportunities for foreign businesses. Foreign companies considering these opportunities often seek out the US Commercial Service (CS) for answers to a range of questions about China’s market for environment-related goods and services. The top-ten questions and answers follow.

Q: What environmental solutions does China need most?

A: Environmental needs vary from region to region in China, but water and wastewater treatment, flue gas desulfurization (used by coal-fired power plants to reduce sulfur dioxide emissions), and river basin management and flood control rank at the top of the list. Water reuse projects and sludge treatment and disposal are also high priorities for local planners.

Because environmental projects often lack funding, demand for market-based environmental solutions that allow investors to reap financial benefits is growing. Opportunities exist in the areas of enironmental treatment, clean production, energy efficiency, and recycling and reuse technologies. Though local planners have shown an interest in industrial waste recycling and municipal waste composting, the market for recycled products remains small, and quality standards for these products are lacking. Demand for remediation of industrial sites is also growing since factories must relocate to make way for residential areas, but local governments have limited resources available for cleanup.

Q: Which regions in China need which environmental projects most?

A: Though it would be convenient to attribute environmental problems to specific regions in China, the nature of air, land, and water pollution are such that environmental problems tend not to stay in one place for very long. Generally speaking, northern China suffers from soil erosion, desertification, and drought; southern China suffers from silting and acid rain; industrial cities choke from air pollution; urban areas lack proper sewage and water treatment; and many of China’s rivers and lakes are seriously polluted.

Fortunately, environmental projects are sprouting up throughout China, from dust control in Inner Mongolia to wastewater treatment in Chongqing to hospital waste disposal in Shanghai. Beijing’s hosting of the 2008 Olympics has cast a spotlight on the city’s environmental protection effort, leading to a host of infrastructure, transportation, and conservation projects (see p.16). Shanghai’s 2010 World Expo plans have spawned similar “green” projects such as clean mass transit, energy-efficient buildings, and auto emissions control. To prepare for the expo, Shanghai launched a three-year (2003-05) environmental protection plan that focuses on water, air, solid waste, afforestation, industrial pollution, and agricultural contamination problems. Nearly 300 projects are planned, including several large sewage treatment plants along the Yangzi River and medium-scale plants on Hangzhou Bay.

Following the leads of Beijing and Shanghai, many cities and provinces have launched environmental protection campaigns to obtain funding from the central government or attract the attention of foreign investors. But many of these projects offer companies low returns on investment. Like much of China’s development, many of the reliable and well-funded projects are located in the coastal regions, where competition is intense. The US CS can help direct US companies to specific projects and regional environmental officials.

Q: In what areas are US firms most competitive in China?

A: Air and water monitoring equipment and laboratory instrumentation are key growth areas in which US firms have an edge over local and foreign competitors in technical capability, reliability, and overall reputation. Most university laboratories in China are outfitted with American-made gas chromatography and other analytical equipment, for example. Industrial air filtration and wastewater treatment systems, clean transportation, and energy-efficient production methods offer additional opportunities.

In the last six months, the US CS has seen an increase in the demand for hospital waste-disposal technologies as well as soil remediation-areas in which US firms offer some of the most advanced solutions in the world.

Q: Many projects in China are funded by concessionary financing or tied aid from foreign governments that require purchase of equipment from the donor country, making it difficult for US firms to compete. Does the United States offer similar tied aid to China?

A: There is much debate among countries about whether tied aid is an effective and fair practice, and the United States does not currently offer tied aid programs in China. Although Chinese project planners will rarely decline free or heavily subsidized equipment deals, many find the red tape and lack of flexibility in purchasing to be undesirable-especially if they prefer a different technology.

Q: How should my company approach World Bank- and Asian Development Bank-financed projects?

A: It is important to identify projects that are likely to receive World Bank (WB) or Asian Development Bank (ADB) funding early in the process by networking with local design institutes, government authorities, foreign engineering firms, and bank project officers. Equipment requirements and specifications for these projects are usually identified before the loan is finalized, well before the tender opportunity is made public. Having a local presence in the market, either through a sales office or a sales agent, helps companies learn about projects early, introduce their technologies, and follow up as the project unfolds. The US CS also has liaison offices at the ADB and WB to help US firms learn more about competing for these projects.

The Export-Import Bank of the United States (Ex-Im) offers loan guarantees and financing options for US equipment sales in China. And to introduce American technologies in energy, environment, transportation safety, and telecommunications, the US Trade and Development Agency (USTDA) offers grants to conduct feasibility studies, training packages, and study trips for Chinese project developers. USTDA grants offer an excellent platform from which to get involved in project planning in China (see http://www.exim.gov/ and http://www.tda.gov/). Ex-Im and USTDA programs can offer incentives to persuade local planners who prefer US technologies to buy American.

Q: Is there much demand for environmental consulting services?

A: Although consultants have traditionally had difficulty selling their services in China, the opening of China’s services market to foreign competition, improved environmental standards and compliance requirements, and the demand for sophisticated technologies have led to more consulting opportunities. Many European firms have been successful in bundling consulting services with turnkey design-and-build projects. Some equipment providers offer free consulting services up front to develop sales later in the project. WB and ADB projects usually include substantial consulting and technical assistance components that are open for bids from international firms.

Though it may be difficult to sell consulting services to China’s state-owned enterprises, the steady stream of foreign investment into China has created a niche for consulting services that offer their expertise to foreign manufacturers throughout the country. Foreign consulting firms that sell environmental due diligence, environmental health and safety, or environmental impact study services to major corporations in the United States or elsewhere should consider offering these services to their clients’ China operations, if they haven’t already. Many environmental consulting firms target multinational corporations in China’s burgeoning manufacturing, information technology, semiconductor, pharmaceutical, and petrochemical industries.

Q: Is it true that the PRC government plans to invest billions of dollars in wastewater treatment?

A: PRC government plans call for massive investment in this sector, but most projects are either financed in renminbi or lack financing altogether. Foreign companies that want to access a larger portion of this market must be willing to accept local currency, make equity investments in projects, or offer competitive financing terms on equipment and technology sales.

Although multilateral bank loans represent a drop in the bucket compared to China’s investment needs, there are several multimillion dollar WB and ADB projects currently in the planning pipeline, including urban environmental planning, acid rain control, river basin management, and wastewater treatment in Anhui, Beijing, Jiangsu, Shanghai, Sichuan, and Zhejiang, to name a few projects. These projects usually offer international competitive bidding opportunities and payment in hard currency.

Q: Do build-operate-transfer (BOT) projects make sense for wastewater treatment projects?

A: BOTs are possible but there are few, if any, profitable BOT projects in China’s wastewater sector. Because environmental projects perennially lack funding, local officials hope to attract foreign investment into this sector by offering 20-30 year operating concessions to foreign companies in return for building the facilities. Since the government commonly subsidizes domestic treatment plant operation, domestic project planners and their foreign counterparts often disagree on the technology and investment required to turn a profit. Low tariff rates, fragmented fee-collection systems, irregular accounting practices, and lack of payment guarantees are key barriers to developing viable BOT projects. These projects make more sense in the water-supply sector where increasing demand, combined with gradually rising water tariffs in residential, commercial, and industrial sectors, make investment more attractive.

Q: Are there any good environmental trade shows in China?

A: There are a number of trade shows in China, but most of them are small and regional, and many are not well organized. The biannual China International Environmental Protection Industry Conference is the country’s largest and will take place in Beijing December 15-18, 2003 (see www.chinaenvironment.com/ciepec2003/). The conference will cover a wide range of sectors including air pollution, water, wastewater, solid waste, recycling, green transportation, and energy conservation. The Fifth Guangzhou International Environmental Protection Exhibition, which will occur November 19-22 (see www.gdepi.com.cn), is also broad in scope. The China Environmental Protection Industry Association plans to organize a large show in Shanghai in October 2004. US firms should consider participating in technical seminars and conferences to network and learn the latest trends. Local government bureaus are often eager to co-organize workshops and technical seminars to introduce foreign technologies.

Q: What kind of assistance can the US CS provide my company?

A: The US CS, part of the US Department of Commerce, offers market research, advisory services, and introductions to key players in the market and has offices in Beijing, Hong Kong, and Shanghai, as well as in Chengdu, Sichuan; Guangzhou, Guangdong; and Shenyang, Liaoning (see p. 14).

The Commercial Service in China publishes a weekly electronic newsletter, US-China Environmental Business News, that identifies key projects, market trends, and events throughout China and also offers US firms a chance to advertise in the Chinese-language US Environmental Handbook, published annually by CS China. For more information, see www.buyusa.gov/china/en.

A final word of advice: Take time to build a presence

China’s environmental sector presents US environmental technology firms with a wide range of opportunities, though competition is intense and the US CS advises firms to select projects carefully, establish a local presence, and focus on well-funded projects. Firms should be prepared to build a sales network, market their technologies, and develop a well-planned business model-including taking the practical and legal steps necessary to protect intellectual property. All of these steps take time.

American equipment vendors may wish to strengthen partnerships with engineering firms and other equipment vendors that sell complementary product lines to offer turnkey solutions. Firms that have established alliances with consultants, contractors, suppliers, or manufacturers in the United States should consider extending those relationships to China to expand networks and improve their competitiveness. With changing market conditions, new environmental regulations, and intensifying, foreign and domestic competition, US firms need to use all available resources to penetrate and develop China’s environmental market. The US CS can help along the way.

James Mayfield, commercial officer, US Commercial Service, heads the Construction, Environmental, and Marine Technologies Team, US Consulate General, Shanghai.

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